Barriers to Islamic Banking Growth

7/30/2019 Barriers to Islamic Banking Growth

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Asian Journal of Finance & AccountingISSN 1946-052X

2011, Vol. 3, No. 1: E4

www.macrothink.org/ajfa56

Barriers to Islamic Banking Growth- Bank Employees

Perspective from Pakistan

Adnan Bashir

Lecturer, Faculty of Management & Administrative Sciences

University of Gujrat, Pakistan

E-mail: [email protected]

Mirza Rizwan Sajid

Lecturer, Faculty of Statistics University of Gujrat, Pakistan


Samra Iqbal

Mphil Scholar, Department of Economics University of Gujrat, Pakistan


Received: September 1, 2011 Accepted: November 20, 2011 Published: December 1, 2011

doi:10.5296/ajfa.v3i1.918 URL: http://dx.doi.org/10.5296/ajfa.v3i1.918

Abstract

The concept of Islamic banking (IB) in Pakistan traces its roots back to late 70s. Since its

inception it has had its fair share of growth. The IB industry, despite its growth during the last

few years, has not fully nurtured and its share in banking industry is moderate 6.4%. This

study explores the view point of bank employees of Gujranwala Division Pakistan regarding

this statistics. By using a sample of 126 respondents, comprising Islamic bank employees

(IBE) and conventional bank employees (CBE) to investigate the factors responsible for low

market share of Islamic banking in banking industry. Our findings indicate that according to

over all sample small network of branches, inadequate info about Islamic banking services,

ignorance to teachings of Islam, trust deficiency towards Interest free banking and location of

banks as the main reason for mere rise of Islamic banking. The factors change if we divide

our sample in subsamples of IBE and CBE. Although considerable work in this area has beendone in world and Pakistan is no exception to this however, the focus of majority of research


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is on the customers view point. This paper explores the roots of modest share of IB from bank

employees angle.

Keywords: Bank Employees, Conventional banking, Employees, Financial system, Islamic

banking.


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1. Introduction

The concept of Islamic financial system (IFS) is as old as the religion Islam itself. According

to Moin (2008) it dates back to the life of the Holy Prophet Muhammad (PBUH), about

fifteen centuries ago when He acted as an agent for His wife business dealings. IFS hasevolved over the years & the phenomenon which started off as a mere means to fulfill

religious obligation has now turned into a more structured & organized way of banking in the

current challenging & difficult economic climate. In the last quarter of 20th century, Islamic

finance industry has made significant progress globally. Moreover, during the last decade or

so the IFS have registered a tremendous increase of about 20 percent per annum. Due to this

it has become one of the fastest growing sectors of the overall financial system.

The breeding seeds of this revolutionary concept of IB were sown in late 1940s & by 1960s

& 1970s IB started taking a meaningful shape. According to Sikand (1997) traces of first

Islamic bank are found in the area of Mit Ghamr in Egypt in 1963 when first interest freeIslamic bank was formed & from onwards it has never looked back. In the years to come IB

took more momentum & with the increasing influence of Middle Eastern countries on the

world economy, due to their oil reserves more and more traditional western banks started

establishing their own subsidiaries or partnerships practicing interest free banking in Muslim

countries. According to Warde (2010) the decade of 1970 saw the emergence of so many

Islamic banks namely Dubai Islamic Bank (1975), Kuwait Finance House (1977), Faisal

Islamic Bank of Egypt (1977), Islamic Bank of Sudan (1977), Jordan Islamic Bank of

Finance & Investment (1978), Bahrain Islamic Bank (1978) and Islamic International Bank

for Investment.

In Pakistan during late 70s serious efforts were put into action to Islamize the economy and

that laid the foundation for modern IB. However it took some time to flourish IB. According

to Awan (2009) the growth of IB in Pakistan accelerated since 2002. This was the time when

State Bank of Pakistan changed its approach to introduction of IB as a change management

issue. According to State Bank of Pakistan (2008) the first full- fledged commercial Islamic

Bank license was issued in 2002[1]. Currently there are 6 full- fledged Islamic banks and 13

conventional banks offering Islamic products. Although Islamization of economy was started

in late 70s, still IB phenomenon has not fully borne fruit and that is reflected in its modest

market share of 6.4%. This figure looks even more surprising, that about 98% people are

Muslims and being a conservative society religious beliefs hold a central importance and

place in the overall thinking process. Although a lot of work has been done in this area from

customers point of view, but studies focusing on employees are very few. According to

Quagraine (2010) employees are the source of energy for the organization. Their non

involvement in decision making can alter the performance of the organization. This study is

an effort to bridge the gap of lack of literature in this area. Moreover the recommendations of

this study can be used by the policy makers to devise a framework for growth of IB.

2. Literature Review

In order to understand the real causes of lack of growth of IB in Pakistan we need to discussin detail what really matters according to employees. Studies focusing on employees point of


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view are very few; hence we will concentrate on what influences customers choice or

decision of doing business with any particular bank. Different researchers have listed

numerous selection criteria & they vary across the globe.

According to Erol and El-Bdour (1989) availability of fast and efficient services, image ofbank and its reputation and confidentiality were the most important factors. They conducted a

study on Jordanian customers. They were of the view that religion was not the most important

reason to select financial institution.

Sudin et al. (1994) observed the behavior of Malaysian customers. They were of the opinion

that provision of fast and efficient services, speed of the transaction and reputation and image

of the bank were the main factors that customers consider important while choosing the

financial institution

Hegazy (1995) carried out a research on the attitude of Egyptian customers. His respondents

were Islamic bank customers. He reached at the result that efficiency and speed of delivering

banking services were the most crucial elements in the selection of bank.

Gerrard and Cunningham (1997) performed study on the Singapore customer. They wanted to

explore the awareness of customers towards the Islamic banking products. Their findings

highlighted the need of strong advertising campaign to overcome the lack of awareness of the

customer regarding the IB.

A study was conducted by Naser et. al (1999) on Jordan Banks clients. They highlighted the

opening time of banks as not helpful.

According to Rammal and Zurbruegg (2006) strong image and availability of services like

ATM and phone banking were the important contributors in customer selection of Islamic

Banking products. They explored the awareness of Australian Muslims towards Islamic

banking. They pointed out that people were interested in IB products; however unawareness

to these products was the biggest hurdle in this regard.

Dusuki and Abdullah (2006) conducted a research on why do Malaysian customers patronize

Islamic banks and they found out that the provision of offering Islamic banking services

should not be taken as far granted success. Other factors like cost & benefits of products

offered, service quality, convenience and size of the bank were equally important if not more

important which influence customers choice.

Haque et. al (2009) stressed upon the importance of availability of good quality services to

influence customers perception about Islamic bank. In addition to this social culture and

religion was also playing its role in this regard. They performed their research on Malaysian

customer choices.

Al-Ajmi et. al (2009) after studied the attitude of Bahrain clients and identified quality of

customer service, friendly staff, qualified personnel, bank brand name, convenience in terms

of parking space and interior design of bank as the main factor for selection of bank.

Rashid and Hassan (2009) looked at the responses of Bangladesh customers. They arrived at


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the conclusion that fast and efficient services, speed of the transaction were the most

preferred factors in choosing an Islamic bank. They negated the religion as basic criteria for

selection of bank.

Abduh and Omar (2010) identified the compliancy to shariah laws, Knowledge of UlamaCouncil of Indonesia (MUI) fatwa towards interest, perceptions towards security of capital

and advertisement of Islamic banks as the most important variables for banks. They explored

the obstacles to Indonesian customers.

Khattak & Rehman (2010) analyzed the customers contentment and their knowledge about

Islamic banking products in Pakistan. Their findings suggested that Islamic banking products

were not well known to majority of customers. In their view, branch location was playing a

vital role in this regard. Moreover they argued that Islamic banks must offer more efficient

products to their customers.

Mansour et. al (2010) after analyzing the UK respondents behavior pin pointed the cost as

the main reason for choosing a bank.

3. Research Methodology

3.1 Data

A well structured questionnaire was used to collect the data from the respondents. This

instrument of data collection consisted of two sections: IST section aimed to obtain

socio-demographic information about the respondents and the 2nd part solicited information

about the 9 possible obstacles faced by employees of Islamic & conventional banks. These

motives were drawn mainly from earlier studies cited above. In the 2nd part five point Likert

Scale was used to obtain answers from respondents. The population of the study consisted of

the employees of Islamic and conventional banks. They were randomly selected from

Gujranwala division. The researcher distributed the questionnaire among a sample size of

around 160 people. Out of those distributed questionnaires, 126 were fully answered while

the remaining 34 were either partially answered or not answered at all. Researcher went to

extra length to make sure that selected sample had diversification in demographic

characteristics. Pre testing was also done to check the validity of questionnaire.

3.2 Methodology

Stratified Random Sampling was used to select the sample. It was considered that

conventional and Islamic bank employees might have different opinions about the barriers of

IB growth. So population of bank employees was divided into two groups: Conventional

bank employees (CBE) and Islamic bank employees (CBE). Proportion allocation method

was used to select the sample from these two said groups.

Chi-Square test of Homogeneity was used to see the difference among more than two

categories of responses. For barriers to IB growth 5-point likert scales converted into 3-point

for data analysis. Strongly agree and agree considered to be one category as agree and

strongly disagree and disagree as disagree. This test shows which category proportion isdifferent from other? So on the basis of this test we can say which assumed factor is


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confirmed in this research. It is important to note that we should not only focus on the p-value

for the confirmation of factors. We also have to see the proportions of category which has

significantly high frequency. It shows that result move towards that direction e.g. high

frequency of agree with p-value < level of significance shows that factor is significant barrier

for IB end vice versa.

4. Empirical Results

Out of 126 respondents 101 were male which constituted 80.2% of sample while remaining

19.8% were female respondents. With respect to age of participants, age group of 25 to 35

was the largest with a figure of 39.7%. Participants of 55 years or elder were in the least

quantity. According to the education of the respondents, people with graduation had lions

share of around 49%. Around 39.7% people had attained masters qualification. These

statistics show that majority of our sample was highly qualified. If we turn our attention to

marital status of correspondents here married people had a figure of 63.5% as compared to37.5% of single.

The researcher found out that 29% respondents were earning 25,000 or less, 49.2% between

25,000 to 50,000.While 16.7% were earning between 50,000 and 100,000, while 6

participants were earning above 100,000. The above percentage shows that majority of the

respondents were earning 50,000 or less per month.

With respect to type of banking, majority of bankers in our population were employees of

conventional banks. Their percentages stood at 69.8% while employees of Islamic banks had

less proportion with 31.2%. The researcher observed that 5-10 years experience category had

25.4% while less than 3 years experience people were 24.6%. In this category least

percentage of 18.3 was of respondents with 15 or more years experience. Table 1 presents

descriptive statistics of the respondents.


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Table 1. Demographic characteristics of the sample

Demographic Categories Frequency %

Age Under 25 23 18.3

25-35 50 39.7

35-45 29 23.0

45-55 14 11.1

above 55 10 7.9

Sex Male 101 80.2

Female 25 19.8

Education Matric 7 5.6

Intermediate 6 4.8

Graduation 61 48.4

Master 50 39.7

Other 2 1.6

Marital Status Single 46 36.5

Married 80 63.5

Monthly Income 0-10000 1 .8

10000-25000 36 28.6

25000-50000 62 49.2

50000-100000 21 16.7

above 100000 6 4.8

Banking Type Islamic 38 30.2

Conventional 88 69.8

Years of Experience Less than 3 31 24.6

3-5 24 19.0

5-10 32 25.4

10-15 16 12.7

above 15 23 18.3

4.1 Barriers to Overall Sample

Table II shows the opinion of IBE and CBE as a whole regarding the lack of the growth of IB.

In this research 77 out of 126 employees of banks (conventional and Islamic both) are of the

view that ignorance to teachings of Islam with respect to financial transactions is a major

factor for low market share of IB. The test of Homogeneity of proportions resulted that this

proportion is significant at 0.05 level of significance. So ignorance to teachings of Islam

regarding financial matters is an important factor for growth of IB system. This shows that

religion is an important consideration for low market share of IB for the respondents of this


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study. This is in-align with the study of Haque et. al (2009) and Mansour et. al (2010). These

studies considered religion as important reason.

When we turn our attention to trust deficiency towards Interest free banking, facts and figures

show that most of bank employees think that people do not trust IB regarding interest freesetup. The present factor is also confirmed through test of Homogeneity at 0.05 level of

significance with p-value .of 000. This could be explained by the fact that Pakistan is an

Islamic country in which majority of people has perception about banking system as interest

based set up, which is not allowed in Islam. So people think that any type of banking cannot

be free of interest. Here findings of our research are consistent with that of Abduh and Omar

(2003).

Although IB is more than 30 years old, however people are not aware of its products and

services. According to our study Inadequate information about Islamic banking products and

services is important factor for lack of growth of IB. Test of Homogeneity at 0.05 level ofsignificance also verifies this. In our study 84 out of 126 respondents said that it is a

significant factor for low market share of IB. This view was shared by the work of Gerrard

and Cunningham (1997) and Rammal and Zurbruegg (2006).

Experienced and skilled human resource is required for effective and efficient system.

Shortage of experienced and qualified staff is also significant hindrance for growth of IB

according to our sample. According to this study 67 out of 136 agree with this. p- value of

0.000 is also significant at 0.05 level of significance. Here our findings were in line with that

of Al-Ajmi et. al (2009).

Literature review showed that Non availability of good quality customer services is also

playing its part in low market share of IB. But according to our findings it is not significant

factor, because majority of bank employees show their disagreement about it. It means that in

Pakistan IB are providing good customer services. Results disagreeing with inadequate

information about Islamic banking service are significant.

Low effectiveness of services is not a hurdle for IB progress. According to results of our

research, number of respondents agreeing and disagreeing to this is almost equal. The results

is not significant due to proportional difference between agree and disagree but due to huge

difference from neutral group.

Previous researches also identified high cost of IB products as main reason for its low market

share. But this research also rejects this notion. The reason for this is the frequency of people

for and against this is almost equal. Moreover p-value is also insignificant at 0.05 level of

significance.

Employees of banking system were of the view that small network of branches and their

locations are very important hurdle in the progress of IB system. Both these factors are

significant at.05 level of significance. Here our results also support the view point of Khattak

& Rehman (2010).

Thus according to the whole group significant factors for low share of IB are


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1) Small network of branches2) Inadequate info about Islamic banking services3) Ignorance To financial Teachings of Islam4) Trust deficiency towards Interest free banking5) Location of banks6) Shortage of experienced and qualified staff

Table 2. Test Result of Overall Sample

Factors Observed

N

Expected

N

Residual Chi Square Test Value

with Significance

Ignorance To financial

Teachings of Islam

Disagree 32 42.0 -10.0 46.429

.000*Not sure 17 42.0 -25.0

Agree 77 42.0 35.0

Trust deficiency towards

Interest free banking

Disagree 32 42.0 -10.0 46.429

.000*Not sure 17 42.0 -25.0

Agree 77 42.0 35.0

Inadequate info about

Islamic banking services

Disagree 27 42.0 -15.0 64.714

.000*Not sure 15 42.0 -27.0

Agree 84 42.0 42.0

Shortage of experienced

and qualified staff

Disagree 44 42.0 2.0 32.333

.000*Not sure 15 42.0 -27.0

Agree 67 42.0 25.0

Non availability of good

quality customer services

Disagree 61 42.0 19.025.857

.000*Not sure 16 42.0 -26.0

Agree 49 42.0 7.0

Low effectiveness of

services

Disagree 54 42.0 12.010.905

.004*Not sure 25 42.0 -17.0

Agree 47 42.0 5.0

High cost of bankingproducts and services

Disagree 47 42.0 5.0

2.905.234

Not sure 33 42.0 -9.0

Agree 46 42.0 4.0

Small network of branches

Disagree 21 42.0 -21.086.333

.000*Not sure 14 42.0 -28.0

Agree 91 42.0 49.0

Location of banks

Disagree 38 42.0 -4.0

19.619

.000*

Not sure 24 42.0 -18.0

Agree 64 42.0 22.0

* significant at .05 level of significance


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4.2 Factors for Subsample:

It was decided to divide the sample into two subsamples i.e. conventional and Islamic and

compare the factors responsible for growth of IB system. Our sample consisted of 38 & 88

respondents respectively. Table III and Table IV highlight these factors.

With respect to 1st factor of ignorance to teachings of Islam, total sample agreed that

ignorance to teachings of Islam is a big barrier for IB growth. Both of our subsamples i.e.

Islamic and conventional bank employees in table III and IV also come to same conclusion.

However according to IBE this is more of concern as compared to CBE due to no. of

respondents in favor of this are in much higher proportion in Islamic than conventional.

Next comes the factor of trust deficiency towards interest free banking system. The overall

sample confirms this as significant hurdle in the expansion of this IB. Results of both

subsamples also think that this is a significant factor. But like previous factor this is much

more important to IBE as compared to CBE. It can be observed that IBE are giving it more

weight than CBE. In this case, 30 out of 38 of IBE are in favor of this factor, however in CBE

only 47 out of 88 agree with this. So it is an important factor for both but IBS employees are

more strongly agree to this than CBS employees.

IBE also give assign more weight to the inadequate information about Islamic banking

products and services as compared to CBE counterparts. This is similar to previous factor

situation.

In the overall sample, we can see that shortage of experienced and qualified staff is a

significant factor. However in case of IBE, is not significant however CBE consider this to bean important factor. It can be said that IBE are biased because being the respondents of this

study; they may not consider themselves as unqualified and inexperienced.

In the next case non-availability of good and quality customer services, both types of

employees show consensus that this is not a barrier to IBS. It can be observed that in both

situations, disagree proportion is high. These results are significant at 0.05 level.


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Table 3. Test Result of Islamic Banking

Factors Observed

N

Expected

N

Residual Chi Square Test value

with Significance


Teachings of Islam

Disagree 2 12.7 -10.740.158

.000*Not sure 5 12.7 -7.7

Agree 31 12.7 18.3

Trust deficiency

towards Interest free

banking

Disagree 7 12.7 -5.737.000

.000*Not sure 1 12.7 -11.7

Agree 30 12.7 17.3


Islamic banking

services

Disagree 6 12.7 -6.736.211

.000*Not sure 2 12.7 -10.7

Agree 30 12.7 17.3

Shortage of

experienced and

qualified staff

Disagree 15 12.7 2.35.421

.067Not sure 6 12.7 -6.7

Agree 17 12.7 4.3

Non availability of

good quality customer

services

Disagree 21 12.7 8.313.000

.002*Not sure 3 12.7 -9.7

Agree 14 12.7 1.3


services

Disagree 18 12.7 5.34.000

.135Not sure 8 12.7 -4.7

Agree 12 12.7 -.7

High cost of banking

products and services

Disagree 17 12.7 4.32.579

.275Not sure 12 12.7 -.7

Agree 9 12.7 -3.7

Small network of

branches

Disagree 8 12.7 -4.725.316

.000*Not sure 3 12.7 -9.7

Agree 27 12.7 14.3

Location of banks

Disagree 12 12.7 -.715.842

.000*Not sure 3 12.7 -9.7

Agree 23 12.7 10.3


With respect to low effectiveness of services, IBE and CBE as whole do not see it as a

problem for expansion of IB. The result of IBE subsample is in aligns with that of overall

sample. Moreover, p-value of .002 is not significant for CBE due to proportional difference

between agree and disagree but due to huge difference from neutral group.

Both types of bank employees show that high cost of banking products and services is not a


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barrier for IBS. In the last two factors, small network of branches and location of branches

are significant barriers for promotion of IB. Both types of employees are showing their

consensus on these factors. These results are significant at 0.05 level.

Thus according to IB employees subsample following are hindrances to IB growth1) Ignorance To Teachings of Islam2) Inadequate info about Islamic banking services3) Trust deficiency towards Interest free banking4) Small network of branches5) Location of banks


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Table 4. Test Result of Conventional Banking

Factors

Observed

N

Expected

N Residual

Chi Square

Test Value

with

Significance


Teachings of Islam

Disagree 30 29.3 .719.727

.000*Not sure 12 29.3 -17.3

Agree 46 29.3 16.7

Trust deficiency towards

Interest free banking

Disagree 25 29.3 -4.317.341

.000*Not sure 16 29.3 -13.3

Agree 47 29.3 17.7


Islamic banking services

Disagree 21 29.3 -8.3 32.205

.000*Not sure 13 29.3 -16.3

Agree 54 29.3 24.7

Shortage of experienced

and qualified staff

Disagree 29 29.3 -.328.659

.000*Not sure 9 29.3 -20.3

Agree 50 29.3 20.7

Non availability of good

quality customer services

Disagree 40 29.3 10.714.068

.001*Not sure 13 29.3 -16.3

Agree 35 29.3 5.7


services

Disagree 36 29.3 6.77.795

.002*Not sure 17 29.3 -12.3

Agree 35 29.3 5.7

High cost of banking

products and services

Disagree 30 29.3 .74.386

.112Not sure 21 29.3 -8.3

Agree 37 29.3 7.7

Small network of

branches

Disagree 13 29.3 -16.361.523

.000*Not sure 11 29.3 -18.3Agree 64 29.3 34.7

Location of banks

5

Disagree 26 29.3 -3.37.386

.025*Not sure 21 29.3 -8.3

Agree 41 29.3 11.7


While CB employees consider following to major hurdle to IB growth

1) Small network of branches2) Inadequate info about Islamic banking services


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3) Trust deficiency towards Interest free banking4) Ignorance To financial Teachings of Islam5) Location of banks

5. Conclusion

There has been a tremendous growth in IB all over the entire world especially in Muslim

countries. Pakistan is the second largest Islamic country in the world in terms of population,

boasting over 98% Muslim population. Although concept of IB in Pakistan traces its roots

back to late 70s, still share of IB is modest i.e. 6.4%. It still remains a surprise why has

Islamic banking not touched the heights as expected? The researcher has tried to debate on

this issue as a banker. According to this study there are number of factors contributing in

the slow progress of IB i.e. small network of branches, inadequate info about Islamic banking

services, ignorance to financial Teachings of Islam, trust deficiency towards Interest free

banking, location of banks and shortage of experienced and qualified staff. The findings ofthis study reveal that people have serious reservations about the truly Islamic nature of IB and

they dont consider current IB according to the true teachings of Islam. SBP being the

regulator of all financial activities in Pakistan needs to revaluate its regulatory and

supervisory role. Although SBP have taken several steps including establishment of its

Shariah Board for compliance to sharia laws. However, lot of work needs to be done in this

regard. The results of this research also identify the need of more work for existing Islamic

banks to make their products acceptable for common man. While each Islamic Bank has

appointed Shariah Advisor, responsible for Shariah compliance matters. But its role needs to

be looked at. Marketing strategies of Islamic Banks may be partially held responsible for low

market share. Existing marketing approaches need to revamp and Islamic banks need to come

up with new marketing ideas to attract more customers. Islamic Banks should try to reach

more people by opening more branches and it will certainly increase public confidence on

them. Islamic banks need to expedite their expansion plans. In addition to this banks need to

train their existing staff to deal with IB products. Workshops, training sessions and seminars

are good way to overcome the lack of qualified personnel. The results of this study provide

some useful insight into the hurdles faced by IB industry and it will pave the way for further

research in this area involving different stakeholders opinion and their demographic

variables.

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Barriers to Islamic Banking Growth

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